Rare Home Office Deduction Win in Tax Court

A taxpayer recently won a Tax Court case involving the home office deduction.

The taxpayer worked for a PR firm based out of Los Angeles, but the taxpayer lived in New York City and was expected to grow and develop the firm’s New York business.

The firm maintained no formal offices in New York. The taxpayer worked out of her 700-square-foot studio apartment.

On her 2009 tax return, she took a sizeable deduction for home office expenses. The IRS audited her, and the case ended up in Tax Court.

Review of Home Office Rules

The rules for taking the home office deduction are generally that you must have an area of your home used regularly and exclusively for business purposes. Exclusively generally means 100%, though as we’ll see in this case, the courts have made exceptions to this rule.

If you’re an employee working from home, there’s an extra hurdle to clear before you can take the deduction: you must be working from home for the convenience of your employer.

In other words, flexible work arrangements where you can choose to work from home don’t qualify because you could also choose to work in your employer’s office.

The Case

In the taxpayer’s case, she had no other location to work from in New York, so the “convenience of the employer” part was met. But she lived in a small studio apartment, and had to pass through the office area to get to her bedroom. Does this blow the “exclusive use” part?

Not according to the Tax Court:

Although petitioner admitted that she used portions of the office space for nonbusiness purposes, we find that her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of such modest dimensions.

The Court cited a 1981 ruling of theirs in which the Court ruled that de minimis personal usage of office space is impossible to avoid in a studio apartment.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”

Jason T. Dinesen, LPA, EA

My name is Jason Dinesen. I own Dinesen Tax & Accounting, P.C., a public accounting firm located in Indianola, Iowa.

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Disclaimer

The articles on this blog are presented for general informational purposes only. This blog, and any responses to questions posed in the "comments" section of blog posts, should NOT be considered tax advice. Because each taxpayer's situation is unique, you should pay a tax advisor to discuss your unique situation before you make any financial decisions.